Thursday, May 14, 2009

NY Times on the opening

Jon Adams with a very informative, informed, and wonderfully balanced article in the NYTimes on the KMT's opening to China:

The response to all this has been a stock market frenzy, especially by foreign institutional investors. JPMorgan announced a target of 8,000 for the Taiex by year-end (the Taiex closed at 6,485 on Wednesday).

Goldman Sachs upgraded Taiwan shares in general to “overweight” this month, saying in a note, “The rapidity and scope of recent cross-strait initiatives are welcome signals that Taiwan may finally reap the economic benefits from a warmer relationship with China.”

Foreign money is adding fuel to a domestic rally that was already underway. Many investors in Taiwan had begun to bet that the island’s economy was finally starting to pull out of the doldrums. Locals have also responded warmly to the Ma government’s tax cuts (the inheritance tax was lowered from 50 percent to 10 percent, for example).

But many investors seem to have glossed over or willfully ignored the fact that many essential details remain unresolved or undisclosed.

For one, the details of which specific sectors will be open to mainland money hasn’t been finalized.

Taiwan will likely allow mainland investment in 98 industries during the first phase, including automobiles, textiles, rubber and retailing, with detailed rules probably coming at month-end, the Taiwan minister of economic affairs, Yiin Chii-ming told reporters this week. But flat panel and contract chip manufacturing will still be shut to mainland investors for now.

Then, the two sides will have to sign a memorandum of understanding, probably in June or July for stock investments, as well as separate agreements for banking and insurance.

“On the Taiwan side, the government is still keeping their cards close to their chest,” said a Standard Chartered economist, Tony Phoo. “We still don’t have details on everything we’re hearing and reading about, so there’s a lot of market speculation.”

The ballyhooed tie-up between China Mobile and Far EasTone is a good example. Some media reports have portrayed it as a done deal, but the Economy Ministry said this week that telecommunications would not be one of the first sectors opened to mainland investment.

Phil Chu of Grand Cathay Securities and other analysts say foreign investors are betting that Taiwan will be another Hong Kong, where the stock market boomed following its opening to mainland investment.

Still, analysts see Taiwan’s opening to the mainland as helping the island’s economic recovery in the short-term, and providing a structural boost in the long-run.

China has already played a part in lifting some sectors. Its rural stimulus plan has increased mainland demand for televisions and other appliances, which has increased orders for Taiwan’s high technology companies. The Taiwanese flat-panel company AU Optronics, for example, said it expected sales to mainland television makers to rise 40 percent this year.

That has helped prop up exports somewhat, offsetting continuing weak demand from the U.S. market.

Ironically, the surge in the stock market and Taiwan dollar could actually slow a recovery by making Taiwanese products more expensive overseas.

Investors in Taiwan’s market have been burned before on exaggerated mainland hopes. Last year, for example, the market rocketed in the two months before Mr. Ma’s inauguration, only to plunge steadily afterward as the reality of the global downturn set in.

Still, Mr. Phoo and other analysts insist the long-term picture is bright. “For eight years, Taiwan kept limits on exchanges and investments,” said Mr. Chu. “But since last year, Ma Ying-jeou has steadily adopted opening policies.”

The stock market peaked at near 10,000 in May of 2008 and began an immediate decline, long before the crisis in October. The pic below from Yahoo shows the last two years....

Note that if the market reaches 8,000, it will still be well below its last peak in May of 2008 when Ma was inaugurated, and the peaks during the Chen Administration. Another speculative boom-bust like the last? You make the call...... use this Bloomberg article on the new risks the market is facing...

“In our view, there are only a few remaining catalysts that are not fully priced in,” the strategists wrote. “On the flip side, we see more risks emerging.”

Following the gains, the Taiwanese benchmark index is now valued at 61 times reported earnings, the second-highest in Asia after Japan, compared with its five-year average of 17 times. The market’s price-to-book multiple has also risen to 1.8 times from a low of 1.07 times set in November, HSBC said.

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3 comments:

The stock market peaked at near 10,000 in May of 2008 and began an immediate decline, long before the crisis in October.Most financial experts point to July 2007 as the start of the economic crisis. Oct 2008 is just when things started to hit bottom.

Re: chartSure, 8000 is still well below the peak, but that's world-wide. TAIEX vs. S&P500. Curiously, the Taiex is still doing better than the S&P for that 2-year period, partly because we didn't have the big dip in early March.

cfimages: But you are ignoring the bubble PRIOR to March, i.e. the bubble running up in anticipation of Ma Ying-jeou's election and subsequent bursting after disappointment after disappointment.

Taiwan's economy is still highly connected to the global economy. It's still the same export-oriented economy. It's very unclear what the substance of this run up is, and if you put your money in now, personally, I think in you are in for a whole lotta risk.

Chinese investment would push up stock prices for very undesirable reasons. To understand why, you need to understand what investors in China with a lot of money lying around can do to invest their money.

If you are an investor from China, notice how the fact that Chinese money is restricted from leaving China by China itself (this is unprofessionally buried in the article). If Chinese investors could invest freely globally, they would be invested in international funds that would be invested in Taiwan and this wouldn't even be a question, except making the investment direct would be slightly more efficient. But they're not. China prior to the downturn was a pressure cooker ready to burst. The stock market, real estate, were in huge bubbles because Chinese had no efficient places to put their money and they can move it nowhere else. Inflation was eating away any cash with the booming exports and restricted movements in currency.

The case with Hong Kong was that China was moving to pipe some of this hot money from China to Hong Kong. So companies in Hong Kong--they weren't going to be making any more money, they weren't any more efficient, they didn't need any less capital--but they started to leap in their valuations.

One alternative to consider is sometimes there is "smarter" money around. That is, maybe they can give you know-how or they are better at managing or they see things other people can't. But that's absolutely not the case here! Chinese investors don't know the Taiwanese economy well, and they don't know technology investing well. They are inexperienced, and they don't and aren't allowed to invest globally.

So basically, my point is, Chinese investors can drive up prices, but for pretty poor reasons, and there's no good reasons, at least at this point in time, for Chinese investment to be valuable in any way over investments by other investors.

If the business environment in Taiwan--government efficiency, streamlined tax policy, more developed capital markets--isn't improved, any growth in valuations is on paper only and a dangerous, fragile bubble.

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